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Advantages And Disadvantages Of Reducing Balance Method Of Depreciation

Advantages Of Reducing Balance Method Of DepreciationThemain advantages of reducing balance method of depreciation are listed below* Reducing balance method is easy to understand and simple to implement. Depreciation is calculated every year on the opening balance of asset.

* Reducing balance method equalizes the yearly burden on profit and loss account in respect of both depreciation and repairs. The amount of depreciation goes on decreasing while the expenses on repairs goes on increasing, so that the total charge against revenue over different years remains more or less the same.

* Reducing balance method is acceptable for income tax purposes

* Reducing balance method matches the cost and revenue of the business. The greater amount of depreciation provided in initial years is matched against the higher amount of revenue generated by increased production by the use of new asset.

Disadvantages Of Reducing Balance Method Of Depreciation

The main demerits of reducing balance method are as follows:
* Reducing balance method charges heavy amount of depreciation in earlier years.

* The formula to obtain rate of depreciation can be applied only when there is residual value of the asset.